On Tuesday the 8th of November, while India and the rest of the world were keenly tracking the much awaited US Presidential elections, Indian Prime Minister Narendra Modi delivered the news that Rs. 500 ($7.5) and Rs. 1,000 ($15) notes would no longer be considered as legal tender- effective from Tuesday midnight . The unexpected government announcement targeted at containing black money, corruption, fake notes, and terrorism, has been touted by some as a stroke of genius while others have highlighted the inconvenience to the common man.

Detailed below are some of the key policies of the demonetization drive.

  • Provision until the 30th of December to exchange old Rs.500 and Rs. 1,000 notes. Provision to exchange beyond 30th December at specified RBI offices.
  • Daily limit of Rs. 2000 or $30 (initially Rs.4,000 or $60 which was then raised to Rs. 4,500 or $67.5) for over the counter cash exchanges at banks.
  • Daily limit of Rs. 2,500 or $37.5 (initially Rs. 2,000 or $30) for cash withdrawals at recalibrated ATMs. Daily limit of Rs.2000 at other ATMs.
  • Weekly limit of Rs.24,000 or $360 (initially Rs.20,000 or $300) for withdrawal from bank accounts.
  • Banks, post offices, and co-operative banks are mandated to report to the Income Tax Department in case cash deposits in savings and current accounts exceed Rs
  • 2.5 lakh ($3750) and Rs.12.5 lakh ($18,750) between November 9th and December 30th, or cash deposits of over Rs.50,000 ($750) are made in one day. The entities will then then have to file a statement of these high value transactions on or before 31st January, 2017.

Demonetization and the Indian Banking Industry

The immediate days following the demonetization announcement were marked by uncertainty and frustration amongst the public and serpentine queues at banks and automated teller machines (ATMs) across the country, with the banking industry working overtime in order to manage the transition process. Given that Rs.500 and Rs. 1,000 notes accounted for over 86% of the value of currency in circulation as of March 2016, the rush to exchange old notes and make withdrawals following the demonetization move, and the paucity of newly printed currency, banks have been struggling with a liquidity crunch. Although Rs.2,000 ($30) notes were dispensed by banks almost immediately following the demonetization announcement, these notes have been associated with small change problems given the reluctance of vendors to accept these high value notes amidst scarcity of lower denominated currencies. To help ease the cash position of banks and address problems associated with change, the Reserve Bank of India (RBI) began issuing new high-security Rs. 500 notes on November 14th which banks subsequently began dispensing. ATMs on the other hand need to be recalibrated in order to accommodate the new Rs.2,000 and Rs.500 notes, with the recalibration of all of India’s 2.2 lakh ATMs expected to take another two to three weeks. In the absence of this recalibration, ATMs have been fast running out of cash given that they only dispense Rs. 100 ($1.5) notes. The limited size of the cash logistics industry only further aggravates the situation, given that there are only eight companies responsible for the replenishment of India’s ATMs. With the sizeable proportion of currency declared illegal tender, daily withdrawal limits at banks and ATMs, non-functionality of ATMs (only about 40% of India’s 200,000 ATMs were functional last week), issues of recalibration and so on, India’s cash crunch situation is likely to persist at least for the next few weeks.

Impact Analysis of Demonetization on Other Sectors

Real Estate: The primary market (developer sells property) is not expected to see much of an impact as most transactions are carried out by means of fund transfer or cheques. The secondary market (property owner resells property) however, involving a large share of black money transactions, is expected to witness a decline in prices, if black money usage is restricted in transactions.

Agriculture: Farmers appear to be finding it hard to pay cash for the operational expenses of seeds and fertilizers, wages to laborers, and other expenses. Moreover, with most of the farming population located in rural India, and poor connectivity to banks in these areas, several work hours are lost in the process of procuring cash. These factors could affect the country’s Kharif harvest (October-November).

Virtual Wallet: India’s major virtual wallet company, Paytm is reported to have registered a 700% rise in overall traffic and 1000% rise in money added to Paytm accounts in almost five days following the government’s demonetization announcement- an only but natural outcome amidst the scramble for cash and change related problems with hard cash.  Virtual wallet companies are expected to continue enjoying an advantageous position amidst the scarcity of cash, and the successful retention of new customers post the currency crisis would support the long term growth of these companies.

E-commerce: Amidst the cash crunch, e-commerce companies appear to be taking a dip in sales given that cash on delivery is the payment mode for almost 80% of the sales of some companies. Companies however appear to be taking efforts to encourage non-cash payment modes through measures such as card-swiping machines at doorsteps and so on, although acceptance of these modes appears to be limited.

On a Final Note

India is still experiencing teething problems given the suddenness of the demonetization announcement, with the secrecy preceding the announcement regarded as key to the success of the demonetization drive. Time will tell if these short terms pains translate into long term gains to forge a new India characterized by greater legitimacy and transparency.

[1] Until the 24th of November however, the government has permitted the use of old notes at Government hospitals, railway ticketing counters, airline ticketing counters, ticket counters of government or public sector undertaking buses, fuel stations authorized by public sector oil companies, crematoria and burial grounds and at other select locations, and for the purchase of liquefied petroleum gas (LPG) cylinders, for making utility bill payments and for other select transactions.

Your Transformational Growth Journey Starts Here

Share This